Reserve Bank minutes: Falling dollar could cruel chances of rate cut

The Reserve Bank left the official cash rate steady at the historic low of 2.75 per cent in July.

AAP: Joel Carrett

The Reserve Bank has signalled that the decline in the Australian dollar could reduce the chance of an interest rate cut next month.

At its July board meeting the RBA left the official cash rate steady at the historic low of 2.75 per cent.

The minutes from that meeting reveal the bank identified the falling dollar as "the most significant change" in the economy in recent months.

For the first time since the dollar began sliding in May, the RBA noted that this decline could lift consumer prices.

And while it still expects inflation to remain within its target range of 2 to 3 per cent, the bank has softened its tone on the likelihood of a rate cut at its August meeting.

"The board also judged that the inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand," the minutes note.

The board said the dollar could still fall further to help the "rebalancing" of the economy away from mining-led growth that the bank has been hoping for since it began cutting interest rates in late 2011.

Westpac senior economist Matthew Hassan says the minutes confirm the view that the falling dollar was the key driver behind the decision to leave interest rates steady in July.

But the minutes acknowledge the weakness in the economy, with growth expected to remain slower than average.

"Since this meeting was conducted we've had softer reads around the monthly business survey, we've had a softer labour market report, another softer retail sales report, again highlighting that domestic demand is tracking not just a touch below trend but significantly weaker than trend," Mr Hassan said.

HSBC chief economist for Australia and New Zealand Paul Bloxham says the RBA has left the door open for another interest rate cut this year, most likely in August.

"I think the RBA is still reasonably confident that that rebalancing is going to occur but it's quite possible they may need to deliver a little bit more stimulus to see it happen," Mr Bloxham said.

The dollar jumped by almost half a cent against the US dollar as markets interpreted the minutes as lowering the chance of a rate cut in August.

At about 12.30pm (AEST) it was buying 91.67 US cents.

Mining investment 'close to, if not past' its peak

The minutes reveal the board also believes the mining investment boom may already have peaked, while it says mining investment is likely to remain high for several months, "it looked to be close to, if not past, its peak".

The central bank expects mining investment to shrink much faster next year, given "a significant decline in the planning and development work that is a precondition for new projects".

The RBA describes the outlook for businesses in most sectors, including mining, as "uncertain".

Despite this warning, the RBA says resources exports are ramping up quickly, and exporters are unlikely to have been hurt by falling commodity prices as the lower dollar shields them from those price falls.

"Even though commodity prices have come down and indeed they fell quite sharply in June, particularly metals prices, that's been more than offset by the decline we've seen in the Aussie dollar, which means that the Aussie dollar's doing what it ought to do - it's acting as a shock absorber for the Australian economy," Mr Bloxham said.

The Reserve Bank has been pinning its hopes on a recovery in the housing sector as part of the rebalancing of the economy, and this month noted the positive effects of the 200 basis points it has already sliced from the official interest rate were most evident in the housing market.

But as it has also been pointing out for nearly two years now, the "substantial amount" of help the RBA has been giving the economy still has further to run.

Official inflation figures due out next week will give a clearer picture of whether the falling dollar will play its part.